We're not in a bubble, says VC lawyer

When Pinterest announced a $5 billion valuation several days ago and Uber said it’s now worth $10 billion, the tech industry read the headlines in awe. But Silicon Valley law firm Fenwick & West’s quarterly survey indicates those valuations are nothing to be surprised about. Indeed, everything in venture capital during the past quarter was “up and to the right.”

In fact, everything was up in the quarter: venture capital invested, venture-backed IPOs, venture-backed acquisitions, up rounds (funding rounds at higher valuations than the prior round), money raised for venture funds, and so on.

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“The bottom line from our survey is that valuations are really strong,” Kramer told VentureBeat in an interview.

Actually, not only is there an increase in up rounds from the previous quarter and a larger spread between up and down rounds (76 and 8 percent, respectively), but a record 11 companies received first-time billion-dollar valuations or higher. It’s worth noting, however, that the survey seems to attribute this to a surge in late-stage investing — 47 percent of all investments, according to CBI.

Here’s CBI’s graph of first-time $1 billion-valuations in the last few quarters:

The survey calls attention to the increase in participation from non-venture capital investors such as mutual funds, hedge funds, public venture funds, and private equity funds as a major reason for this increase in valuations. These alternative investors participated in 23 deals through mid-April compared to only 41 deals in all of 2013, according to the Venture Capital Journal.

IPOs are another area the survey found to be coming back strongly. VentureSource reported 38 for the quarter, and Thompson Reuters/NVCA reported 36. When annualized, VentureSource’s 38 exits give us a prediction of 152 IPOs for all of 2014 — that would make 2014 the most active since 2000, the height of the dot-com bubble.

“Companies in general are waiting longer to go public,” said Kramer.

“First, government regulation is putting a lot of extra regulation on companies, so for companies, to be worthwhile to deal with it they wait longer. [Second,] in my view, the public market is being pickier. And third, the secondary markets” are growing, he added.

Are we in a bubble?

Perhaps the most interesting part of my conversation with Kramer was his take on what this survey (and the recent ones before it) says about the stability of the market.

“We are not in a bubble,” said Kramer.

Kramer believes that there are three elements that can help determine this. First, one sign of a bubble are very high valuations.

“Well, high valuations that aren’t supported by fundamentals, and people are arguing on that,” he said.

Second, the volume of deals, and specifically, a very high number of deals done at these incredibly high valuations. “There’s a limited number of select companies, they’re valuations are incredibly high,” said Kramer. This is an element not currently present, he said.

His third point is that “You also see tons of companies with pretty good business models, but it’s hard to get high valuations,” a sign that the market is lacking the blind frenzy we saw back in the dot-com bubble.

Obviously, this only one way to consider this question. Two years ago, we heard Marc Andreessen say that he doesn’t believe we’re in a bubble, although the 2011 and early 2012 numbers and investor comments said otherwise. Recently, Jeff Sommer and Farhad Manjoo, both of the New York Times, described the current tech industry as a bubble but that it wasn’t that bad — at least not for everyone. Manjoo wrote:

This is the silver lining of a tech bubble. If investors and acquirers keep throwing money into tech — at companies from Box to Dropbox to Square to Uber to WhatsApp to Postmates and more — we’ll get more great products at low prices. We might even get services completely for free, even if it imperils the companies offering them. So as long as you don’t make the mistake of investing in dubious tech dreams, you may be able to ride out the bubble to some pretty great swag.

In his piece, Sommer concluded that although bubbly, the market isn’t as bad as the dot-come bubble:

The point is that even if prices are high in the overall market, they are being backed up by earnings to a much larger extent than in 2000. That’s important, because back then, when the dot-com bubble burst, the downdraft brought most companies down with it. And that’s why some people applauded when shares of King Digital, the Candy Crush maker, dropped 16 percent on their first day, while the rest of the market was largely unaffected.

“People still remember and learn from the dot-com era,” said Kramer. Those memories will keep the market players from getting too crazy, he said.